There are many loans out there that give you the ability to fund your business. However, the important loans given out by banks or other lenders are traditional, home equity and SBA loans. These loans offer significant dollars and are ideal for many small business owners.
Traditional bank loans are loans that most entrepreneurs think of when looking to raise debt capital. These loans are deposited as one lump sum into your account, where you are then required to pay the bank a monthly interest on the amount borrowed. Although traditional loans tend to offer low interest rates, especially when backed by collateral, they are difficult to receive as an early-stage business.
Bankers will often ask for a three year operating history or other financial documents in order to assess the risk of your business. For those businesses with healthy revenue streams this may be good news, but many start-ups do not have the luxury of past financial statements. Furthermore, many banks will restrict the use of funds on traditional loans. Common loans offered are restricted to working capital, purchasing machinery, or modernizing and renovating activities.
The unique thing about home equity loans is that they are secured by your home. This gives banks an insurance policy should you not be able to meet monthly interest and principal payments, and also provides you with lower interest rates.
Moreover, by placing your home as collateral, the banks are less reliant on your business’ ability to generate revenues. Thus, home equity can be a valuable method of raising capital for early stage businesses that currently do not have strong revenue streams.
The Small Business Administration was essentially created to fill the obvious conflict of interest when it comes to loans and early stage businesses. Start up businesses cannot provide a lot of the financial documents that traditional lenders require, and thus they have difficulty in securing a loan.
The government however, realizes the importance of small businesses and offers loans to entrepreneurs like yourself through the SBA. What makes these loans unique is that they are partially backed by the government. In other words, it takes some of the risk away from the private lender, giving you access to competitive interest rates and a better chance at acquiring a loan.
In comparison to traditional loans, SBA loans require more paper work. However, the loans are geared towards focused entrepreneurs who show promise in creating a successful business in the long run.
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